The US Federal Reserve has approved measures to give mortgage holders far more protection to prevent the current housing crisis from worsening further.

Tough new regulations will ensure lenders take into account a borrower's ability to repay a loan and would not penalise those making early repayments.

The Fed is under pressure to help those with poorer credit histories amid a wave of defaults on sub-prime loans.

The housing downturn has triggered a slowdown in the US economy.

Tougher standards

The Bush administration acted earlier this month to help sub-prime borrowers amid fears the spiralling housing market could erode consumer confidence and push the US into recession.

It announced a five-year freeze on interest payments for certain sub-prime loans.

The Fed's board endorsed proposals to stiffen the regulation of mortgage lending practices which chairman Ben Bernanke said would "promote responsible lending".

Many Democrats believe the Fed's oversight of the mortgage market during the housing market boom between 2001 and 2005 was lax, and that irresponsible lending, allied to a tide of cheap credit, caused a dangerous property bubble.

The proposals, which will be subject to public consultation in the next few months, will come into force next year. They will include:

Lenders could not agree loans without proof of income

Borrowers must set aside money for taxes and insurance

Lenders would have to make financial disclosures earlier

Certain forms of advertising would be banned

All loan rates must be displayed prominently, not just introductory or so-called "teaser rates"

Mr Bernanke said the tougher regulations would benefit individuals and the economy.

"We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated," he said.

Since the new regulations will only apply to future loan applications, the Fed is likely to be criticised for acting too late to help existing homeowners in trouble.

According to research from the Mortgage Bankers Association, the number of foreclosures on sub-prime adjustable loans hit record levels between July and September.

"Had rules like this been in effect, the run-up in foreclosures might never have occurred," Allen Fishbein, director of housing and credit policy at the Consumer Federation of America, said of the Fed's proposals.

'Serious challenge'

The Bush administration has said it is facing up to the "serious challenge" posed by the sub-prime crisis and its knock-on effects on the economy.

Speaking on Tuesday, Treasury Secretary Henry Paulson insisted that its mortgage rescue plan did not constitute a bail-out for irresponsible borrowers.

"What we are doing in the government is acting to prevent a market failure, bringing the industry together to do something which is in their best interest," he said.

The Fed has cut interest rates by one percentage point in the past few months to try to ease the burden on borrowers.